Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?
One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Kirkland's (NAS: KIRK) fits the bill.
The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:
Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.
With those factors in mind, let's take a closer look at Kirkland's.
What We Want to See
Pass or Fail?
5-Year Annual Revenue Growth > 15%
1-Year Revenue Growth > 12%
Gross Margin > 35%
Net Margin > 15%
Debt to Equity < 50%
Current Ratio > 1.3
Return on Equity > 15%
Normalized P/E < 20
Current Yield > 2%
5-Year Dividend Growth > 10%
5 out of 10
Source: S&P Capital IQ. Total score = number of passes.
With five points, Kirkland's falls right in the middle of our scale. The retailer has had an up-and-down couple of years, but it's been on the upswing again recently.
Kirkland's bills itself as a home decor store, selling a variety of furniture, home accessories, and other items for household use. Unfortunately, that hasn't been the easiest niche to succeed in during the housing slump, as less interest in new-home buying also means less shopping for stuff to put in those newly bought homes. Among home-oriented retailers, only Bed Bath & Beyond (NAS: BBBY) has managed to sustain strong revenue growth over the past several years. Along with Kirkland's, Pier 1 Imports (NYS: PIR) and Williams-Sonoma (NYS: WSM) both have sales stuck well below where they were during the housing boom.
But recently, new optimism about a return to housing strength has boosted shares of Kirkland's and its peers. Kirkland's has to compete with online giant Amazon.com (NAS: AMZN) , but so far, it's done a good job of meeting expectations and posting reasonably strong results. Amazon is great for purchases of standard items, but for unique decorations, online shopping is a lot harder than walking into a store.
For Kirkland's to make more progress toward perfection, it needs to keep looking for new avenues for growth. Whether that comes organically or through acquisitions, a bigger Kirkland's could be well-timed if the housing market is finally approaching a bottom.
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.
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At the time thisarticle was published Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. The Motley Fool owns shares of Amazon.com. Motley Fool newsletter services have recommended buying shares of Williams-Sonoma, Amazon.com, and Bed Bath & Beyond. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.
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